Are you an outcome-oriented investor, or a process-oriented investor? Barry Ritholtz says he’s the latter, and you should be too. Continue reading
After a huge decade-long runup, gold has tumbled in recent years, pounding portfolios of many gold bugs. “The mania for gold, like all manias preceding this one, is ending badly,” Barry Ritholtz of FusionIQ and The Big Picture blog explains in a Washington Post column. “And while gold may yet establish a comeback, much of the damage has already been wrought.”
Ritholtz says the gold bust is a good learning opportunity for investors, however, as it provides several broader lessons. Among them: Beware the narrative (investors get attached to powerful stories even after the facts change); don’t ignore history (no investment goes up forever); and don’t guess (unlike equities, gold has no fundamentals, so many tried to guess how its price would change based on nearly impossible to predict macro factors).
“The ups and downs of gold over the past 10 years are not unique,” Ritholtz says. “Like any other investment, people became emotionally involved with the trade. Mistake were made, money was lost.”
When it comes to market and economic forecasts, top strategist Barry Ritholtz has some advice: Ignore them.
“The simple truth is that, as a species, you humans are terrible about making predictions,” Ritholtz writes in a Bloomberg column. “Forget forecasting big events that are not in your control, such as the economy or the market, you cannot even forecast your own behavior. If you could, the fitness and diet industries would be bankrupt.”
Making predictions, Ritholtz says, can set the stage for dangerous behavioral biases. “The true danger of forecasting is not that you will be wrong — the odds are you will — but rather the natural tendency to stick to a forecast regardless,” he says. “Instead of adjusting to changing conditions, we have the odd tendency to marry the old prediction.”
Barry Ritholtz says that too many investors are underinvested in stocks, saying that the market rally has been “hated” by many. Ritholtz tells Bloomberg that pullbacks are a part of bull markets, but investors seem to take every minor pullback as a sign off disaster these days. He talks about how difficult it is to jump back into the market at the right time after you’ve jumped out. And he talks about how a myriad of factors drive the market — not just one, as the headlines often make it seem.
Though the government shutdown and debt deal drama are monopolizing the financial headlines, Barry Ritholtz of The Big Picture blog says it’s had little impact on his investing approach. And it will stay that way, he says — so long as the stalemate doesn’t last longer than a few weeks. Ritholtz tells Yahoo! Finance’s Daily Ticker about a study that looked at 17 past government shutdowns, and how stocks responded to them. He says that in most cases, the shutdowns were just a blip on the radar in terms of what they did to the market. “Where it becomes a concern … is if weeks turn into months,” he says. “If it goes past three or four weeks, that could take a big chunk off GDP, effect consumer confidence and really have an impact on earnings.” A big negative pull on earnings could mean a potential 20% to 30% decline for stocks, he says. If the standoff does last more than three or four weeks, Ritholtz says he’ll probably start lightening up on his equity holdings and looking at ways to hedge his portfolio. But until then, he appears to be staying the course.
In a recent Washington Post column, Barry Ritholtz says that too many investors are still getting victimized by “muppet portfolios”.
“Muppet portfolios,” Ritholtz says, are portfolios “assembled for the sole purpose of maximizing commissions to the retail broker, period.” He talks about the way Wall Street assembles these portfolios and pitches them to unsuspecting retail investors. “About 10 percent of the new accounts that we see are muppet portfolios,” he says. “These typically hold hundreds of positions. Mind you, these are not from a family office with $150 million, but a portfolio 1 percent of that size. There is no rational reason for these sorts of assemblages to be holding 100-plus positions.”
Ritholtz says that investors are far better off by diversifying through low-cost funds. He suggests owning what he says are the 15 broad asset classes — including different types of stocks, bonds, Treasuries, commodities, and more. “You want to own all of these because from year to year, no one ever knows which asset class is going to perform the best,” he says. “And no one can tell in advance which asset class is going to have a bad year. So you own them all, and you don’t worry about it. Much of what you own is going to be going up most of the time.” He says the great thing about diversifying is that it’s “about as close as you can get to a free lunch in investing” because of the ability to buy index funds or ETFs focusing on these broad asset classes at extremely low costs.
Barry Ritholtz of Fusion IQ and The Big Picture blog says he’s dialing back a bit on U.S. stocks, and making bigger pushes into two unloved areas of the market: emerging market stocks and European stocks. “[Emerging markets] are the cheapest markets that are out there. They’ve gotten absolutely shellacked,” he says. “We love when markets get shellacked because it makes things attractive for long-term purchases [those with a 5 to 7 year horizon].” Ritholtz says he’s now at equal weight on U.S. equities, and is overweighting EM and European stocks. He’s investing in those areas through broad index funds that diversify risk over many countries, noting that many EM funds focus too heavily on the BRIC countries. Ritholtz also had this to say in a recent letter to clients: “Rather than focus on the headlines, which tell us only what has already happened, we are much more interested in valuations. Valuation trumps macro-tourism every time. Our asset allocation models are currently maintaining their weightings to Emerging Market equities, despite their recent unpopularity, and we are actively investing in Europe. We know this will require patience on our part, but we believe it will pay off over the long term. We feel that behavior, not a focus on the news of the day, is what separates good investors from the rest of the pack over time.”
Everyone loves a good story. But in the investing world, getting too caught up in a good story can lead to serious trouble, Barry Ritholtz notes.
On The Big Picture blog (h/t Abnormal Returns), Ritholtz examines why, with stocks at all-time highs and the worst recession in 80 years behind us, so many people in the investment world seem so upset. Part of it is that many are upset that they’ve missed a 140%+ rally. “But there is a deeper, more fundamental reason for the unfocused rage and misdirected anger,” he adds. “The failure of the narratives that have been driving much of economics, investing and politics. As John Kenneth Galbraith famously said, ‘Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.’ Rather than accepting certain unpleasant realities, many participants have contorted themselves into a painful waiting game. They are ‘busy on the proof.’”
Ritholtz says this is an example of the “cognitive dissonance” that can be so dangerous to investors. “As many of the narratives have failed, rather than admit the error and face the music, the rationales have morphed into a waiting game,” he says. “Dow 5000 will happen eventually, Collapse of the Dollar — and all fiat currencies — is coming; Hyper-inflation (any day now), Gold will hit $10,000 (sold to you), Great Recession 2, Oil $200, etc. The reference is not to any one of these errors specifically, but rather, to the entire narrative driven belief systems in general. They are by design money losing stories, either torturing the data or ignoring it entirely.”
Cognitive dissonance plays out in a variety of ways that damage your portfolio, he says: “It’s coming up short in your forecasts, and making all the usual excuses. It’s rationalizing why you are right and the markets are all wrong. It’s doubling down on the bad trades, despite the obviously failure of the original thesis. It’s sticking to your story no matter what the facts are.” Good investors, he says, are adaptable, and don’t let the story drive their decisions.
Barry Ritholtz of FusionIQ and The Big Picture blog has some advice for investors: Shut off your TV, and don’t listen to the “experts” in the financial media.
“Studies have shown that the most confident, specific and detailed forecasts about the future are: a) most likely to be believed by readers and TV viewers; and b) least likely to be correct,” Ritholtz tells Financial Advisor magazine. Humans, he says, are not good at all at forecasting, and he readily admits that any forecast he could offer would be useless. “My opinion as to the future state of the economy or where the market might be going will be of no value to your readers,” he says. “Indeed, as my blog readers will tell you, I doubt anyone’s perspectives on these issues are of any value whatsoever.”
Ritholtz says what’s of value is looking at the present, and trying to put it in context. And right now, he says, “Markets are neither cheap nor expensive. The psychology out there is that the public remains wary — of everything that burned them over the past few years. I believe many factors are leading to a sort of delegitimization of investing in the eyes of the public. Everything from lack of prosecution of bankers to HFT [high frequency trading] is causing the public to turn their collective backs on stocks. This is a normal part of the psychology cycle; typically, a bull market will end this disregard.”
Ritholtz cites three issues that he’s most concerned with right now: high frequency trading, Too Big To Fail, and derivatives. He offers his take on how to address them.
Ritholtz’s advice to financial advisors: “Learn to think in terms of years and decades, not days or weeks. Use a good asset allocation model to own a broad and diverse (low fee) asset classes. Rebalance regularly. Give up the stock picking (leave that to the idiots on TV). Oh, and shut the TV altogether.”
While many market commentators were blaming Thursday’s declines on fears of the Federal Reserve tapering its asset-purchasing program, Barry Ritholtz is skeptical — and says the attempts to explain the declines highlight a big problem in investing.
“The issue at hand is the tendency to explain what just happened int he market after — and not before — it specifically occurs,” Ritholtz writes on The Big Picture blog. “I call this the Ex Post Facto Market Rationale, and this week’s turmoil is a perfect example of it.”
Ritholtz says this phenomenon “reflects so many human cognitive foibles all in one place”. For one thing, he says, humans love narrative, and will often thus try to explain what has just happened despite not having enough evidence to do so. For another, he says most of the day-to-day movement in the stock market is “random noise, which defies rational explanation”. He also says generally there is a lengthy lag time of months or even years when it comes to truly understanding what happened today or yesterday. But people want to “impose order on chaos, to see patterns where none exist,” he says, so they form explanations — often incomplete or erroneous explanations — of why stocks behave the way they do in the short term.
Ritholtz says he doesn’t know why the market had such a big down day Thursday, but he highly doubts it was all about the Fed and tapering. Little new information came to light about the Fed’s plans to justify such a big sell-off, he says. A potentially better explanation: “Up 16% in the first five and half months of the year is simply too rapid an ascent; we are now looking at whatever rationales after the fact — ex post facto — to justify returning to a more normalized market real rate of return.”